Italy may be one of Europe's struggling economies, fighting to
avoid being dragged into bankruptcy and out of the Eurozone by
its looming sovereign debt. But that didn't keep Turin-based Fiat
Industrial from nailing down a $1.5 billion deal to buy
Illinois-based tractor makerCNH Global (
) in November.
The deal gives Fiat the 12% of CNH it didn't already own, as
well as control of CNH's $5 billion cash war chest. Fiat, which
owns Iveco trucks, plans to streamline CNH and merge the two
companies into a new entity.
At about the same time, farm equipment makerDeere (
) announced mixed fiscal fourth-quarter results, with sales above
and earnings below analyst estimates. It guided 2013 sales
expectations to 5% growth, less than half of this year's 13% gain
and only slightly less flat than a Kansas corn field.
In the quarterly conference call, financial officer Raj
Kalathur told analysts the looming "fiscal cliff" in the U.S. and
slowing growth in China would likely have no "lasting impact on
the powerful tail winds" the company sees driving "demand for
agriculture and construction equipment well into the future."
Those tails winds are generated by global population growth
expected to rise 16% to 8 billion by 2025, according to the U.N,
Department of Economic and Social Affairs. A growing portion of
that population is learning to love higher protein, better
Another tail wind for farmers and equipment makers has been
price pressure created by ethanol demand. A combination of tax
credits and renewable fuel mandates helped boost corn used for
fuel production more than 600%, to 4.5 billion bushels between
2000 and 2012, according the U.S. Department of Agriculture.
That made the farming sector one of the most successful
segments of the U.S. economy, increasing farm incomes to record
levels even as the rest of the country suffered through a
recession. U.S. equipment sales shored up Deere and other
equipment makers as global sales slipped.
IBD's Machinery-Farm equipment industry group gained ground in
the fourth quarter, reaching a No. 43 ranking Friday, up from No.
147 at the start of September. CNH has posted the biggest gain so
far for the quarter among the group's seven stocks, up 24%. It is
up 34% so far for the year. That is just behind irrigation
equipment makerLindsay Corp's (
) 41% year-to-date gain and ahead of the 29% advance by
Japan-based tractor maker,Kubota (
But analyst Charles Neivert at Dahlman Rose says the group
faces challenges ahead, as U.S. farmers shift spending priorities
for their businesses.
"Equipment isn't high on the list because of turnover rates on
the equipment. Farmers already went through a phase of buying
equipment, so unless someone invents something really new, growth
will be harder," he said.
The United States remains the largest producer and exporter of
corn and soybeans in the world. In 2012, it has exported nearly
twice the amount of corn as its nearest competitor, Argentina,
and more than 20 times the corn exported by the third largest
The U.S. is also the world's largest wheat exporter, but now
ranks third in wheat production, overtaken by rapid growth in
China, India and Russia. Global wheat production increased 179%
between 1960 and 2012. The number of acres used to produce that
wheat increased over the same period by only 7%.
Innovations in seed types, fertilizers and insecticides all
contribute to that increase in efficiency. But so does expanding
use of mechanical farming, with more farmers in more countries
turning to more advanced tractors, combines and other
Deere's green and yellow leaping deer logo is an international
symbol of successful farming. So is the triangle Cat logo of
construction and agriculture equipment giantCaterpillar (
). Caterpillar is listed in IBD's Machinery-Construction/Mining
Lindsay is among the group's smaller players, providing
crop-scale irrigation systems, as well as specialized
construction barriers for road builders.AGCO Corp. (AGCO) owns a
long list of international equipment names, including the Fendt
and Massey Ferguson brands.
Farmers in developed economies might be forced to make changes
to their equipment as the European Union and the U.S. pass rules
reducing engine emission allowances. Rising farm employment in
some developing economies could help boost farm equipment makers'
international opportunities, but equipment needs in China and
other developing nations are smaller than in the U.S.
Deere and Lindsay will continue to dominate the market in the
"Market share doesn't change quickly in this business; changes
are glacial," said Stephen Volkmann, an analyst at Jefferies.
"What drives businesses is overall farmer sentiment, age of the
fleet and the need for people to replace more equipment."
More than any other industry, the weather affects the economic
climate of the agriculture industry. The 2012 drought in the U.S.
destroyed much of what was supposed to be the largest crop
planted since World War II. The drought knocked down this year's
corn yield by 17%, but the price rose 25%, Kalathur said in a
phone interview with IBD. That kept most farmers on track to post
a healthy year.
"Farmers' financial pictures are (doing) well. Those who
didn't produce a crop had insurance so they weren't at a total
loss, so they have money to spend," Neivert said.
How farmers will choose to spend their cash remains to be
Overseas, the Ukraine also suffered a drought this year. The
weather was more forgiving in other countries, providing
opportunities for equipment makers.
"The Europeans and South Americans had a good year last year
and produced a lot of crop," Volkmann said. "Deere made an effort
to grow more overseas. Because they have a strong position in the
U.S. they are looking to balance out the U.S. cycle with the
Farmers have always been at the forefront of technological
development. Deere was founded by a 19th century blacksmith who
innovated a steel edge for horse-drawn plows. CNH, formed in the
combination of the Case and New Holland companies in 1999, is
descended from Jerome Case who manufactured the country's first
successful threshing machines.
Today, Deere offers unmanned tractors, able to operate without
a driver, freeing up a worker for other jobs. GPS mapping helps
farmers get the biggest yield out of the sprawling farms that
blanket the Midwest. Deere's new model 7760 cotton picker not
only harvests the cotton, but also rolls it into bales, then
wraps the bale.
Other companies, including electronics makerTrimble Navigation
(TRMB), provide laser and satellite guidance equipment. These
allow farmers to grade fields perfectly level, which helps to
retain water applied by irrigation equipment. It also enables
farmers to grade fields to a prescribed tilt, so that chemical
runoff can be directed into catchments.
The key, Kalathur says, is spending to develop precisely what
farmers need most.
"We don't provide technology just for the sake of technology,"
Kalathur said. "We do it to understand the need of the
Volkmann sees flat growth in North America for the industry in
2013. Brazil, on the other hand, will see double-digit growth
while European sales will rise slightly.
"Longer term, I think we are near peak in North America," he
said. "But that should continue at these high levels for several
years absent some kind of external event. In Europe and Brazil,
and in other emerging markets, I think there will be a need for
agriculture infrastructure growth for the next several
As severe as the drought was, it might actually be good news for
farm equipment makers.
"After drought years we have seen an increase in equipment
sales," Kalathur said, citing 1988 and the mid-'90s as booms in
Deere gave flat guidance for 2013, but it is hoping that
growth will kick in from developing markets in the long run as
the markets mature. Deere's long-term goal is to have 50% of its
sales originate outside the U.S as developing markets mature.
Farm equipment sales have been growing for the past 10 years, the
typical length of an industry growth cycle, according to
Volkmann. Farms may use the extra cash from high crop prices to
buy seeds or goods other than equipment.